Monday, October 7, 2013

I would like to continue writing about the research
we have been doing, and I discuss in this post the financial fragility of
American families. This is a topic I have written about before—I started this research
project some years ago, during the financial crisis—but the work is continuing
and it is important to examine how families are doing in the wake of the
financial crisis.

Financial fragility is measured by a new and simple survey
question, which was originally used in the 2009 Global Economic Crisis Study
and was later added to the 2012 National Financial Capability Study. The question is worded as follows:

“How confident are you that you could come up with
$2,000 if an unexpected need arose within the next month?”

Respondents could reply:

I am
certain I could come up with the full $2,000

I could
probably come up with $2,000

I could
probably not come up with $2,000

I am
certain I could not come up with $2,000

The amount was meant to reflect an unexpected
expense, such as a car or home repair, a large medical expense (e.g. an
emergency room visit), or another urgent need that had to be addressed in a
month’s time. When asked in 2009, we found that about half of American families
were certain they could not or probably could not come up with $2,000 in 30
days. This is a high proportion, perhaps telling us what a profound effect the
financial crisis was having on the finances of so many families. But when the
question was asked again in 2012, 40% of families said they were certain they
could not or probably could not come up with $2,000 in 30 days. The proportion
of those who were certainly not able to come up with $2,000 was about the same as
it had been in 2009, about 25%; in other words, one in four families was
certain they could not deal with an unexpected expense both during and in the
years following the financial crisis.

In an earlier post, I discussed the 2009 data, and I
want to focus now on the 2012 data. While financial fragility is more pervasive
among the young, among African Americans and Hispanics, and among those with
low income and low educational attainment, it is still high among many families.Let’s look at a group that should be better
able to weather a shock: older respondents on the verge of retirement (age 56–61).
This group should be close to the peak of wealth accumulation and is expected
to have accumulated resources to both keep consumption stable upon retirement
as well as when facing a short-run shock. But according to the data, about 36%
of older respondents stated they could not come up with $2,000 in 30 days.

There are other indicators in the data corroborating
the finding of financial fragility among older adults. For example, about 40%
of respondents in this group state they have too much debt. And debt they do
have: they have mortgage debt and credit card debt. They have borrowed on their
retirement accounts, and they have used payday loans and pawn shops. And
medical expenses seem to be contributors as well, as a whopping 24% of older
respondents report having unpaid medical bills. So, even those at a point in
the life cycle when they should be well-equipped to deal with shocks are, in
fact, financially fragile.

The worst of the financial crisis may be over, but
many American families—even those who are expected to have accumulated wealth—are
far from being insulated from shocks.A
protracted government shutdown may take a toll on the families of public
employees.And if it affects the
confidence of the American public, it may make other families feel more
insecure too.After a Great Recession,
we need to find ways to strengthen the capacity of families to deal with short-term
shocks. It seems we are instead adding more of those shocks.

My picture

About Me

Annamaria Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.